Hans-Werner Sinn, Professor of Economics and Public Finance at the University of Munich, is President of the Ifo Institute for Economic Research and serves on the German economy ministry’s Advisory Council. He is the author, most recently, of The Euro Trap: On Bursting Bubbles, Budgets, and Beliefs.

Europe’s Path to Disunity

MUNICH – The motto of the United States of America is: “E pluribus unum” (Out of many, one). The European Union’s motto is “In varietate concordia,” which is officially translated as “United in diversity.” It is difficult to express the differences between the US and the European model any more clearly than this. The US is a melting pot, whereas Europe is a mosaic of different peoples and cultures that has developed over the course of its long history.

That difference raises the question of whether it is worth striving for a United States of Europe – a concept that many refuse to accept, because they do not believe in the possibility of a unified European identity. A single political system like that of the US, they insist, presupposes a common language and a single nationality.

Perhaps the idea of a United States of Europe, the dream of post-war children like me, can never be realized. But I am not so sure. After all, deeper European integration and the creation of a single political system offer solid, practical advantages that do not require a common identity or language. These advantages include the right to move freely across borders, the free movement of goods and services, legal certainty for cross-border economic activities, Europe-wide transportation infrastructure, and, not least, common security arrangements.

Banking regulation is the most topical area in which collective action makes sense. If banks are regulated at the national level, but do business internationally, national regulatory authorities have a permanent incentive to set lax standards to avoid driving business to other countries and to lure it from them instead. Regulatory competition thus degenerates into a race to the bottom, since the benefits of lax regulation translate into profits at home, while the losses lie with bank creditors around the world.

There are many similar examples from the fields of standards, competition policy, and taxation that are applicable here. So, fundamental considerations speak for deeper European integration, extending even to the creation of a single European state.

The danger of following such a path always lies in the fact that collective decision-making bodies not only provide services that are useful to everybody, but also may abuse their power to redistribute resources among the participating countries. Even democratic bodies are not immune to this danger. On the contrary, they make it possible for majorities to exploit minorities. To counter this threat, democratic bodies invariably need special rules to protect minorities, such as the requirement of qualified majority voting or unanimous decision-making.

The decisions taken by the European Central Bank are a particularly dramatic example of this problem, taken as they are by a simple majority of a body that is not even democratically elected. The ECB’s decisions lead to a massive redistribution of wealth and risk among the eurozone’s member states, as well as from stable countries’ taxpayers, who have little stake in the crisis, to global investors directly affected by it.

The ECB has been providing virtually all of its refinancing credit to the eurozone’s five crisis-stricken countries: Italy, Spain, Portugal, Greece, and Ireland. All the money circulating in the eurozone originated in these five countries and was then largely used to buy goods and assets in the northern member countries and redeem foreign debt taken from them.

The US Federal Reserve would never be allowed to conduct such a regionally imbalanced policy. The Fed cannot even provide credit to specific regions, let alone states on the verge of bankruptcy (for example, California).

And now European Council President Herman Van Rompuy, backed by most of the troubled eurozone countries, is again proposing Eurobonds and debt-mutualization schemes. These ideas go well beyond the American system. The kind of fiscal integration and centralized power that they would require do not even remotely resemble those in place in the US.

Van Rompuy’s proposals are extremely dangerous and could destroy Europe. The path toward a union based on joint liabilities, against the wishes of large parts of its population, is not leading to a federal state in the true sense of the term – that is, to an alliance of equals, who freely decide to unite and promise to protect each other.

Nor can this path lead to a United States of Europe, simply because a large part of Europe refuses to follow it. Europe is not identical with the eurozone. It contains many more countries than those that use the euro. As useful as the euro could be for Europe’s prosperity if its obvious flaws were corrected, the way that the eurozone is now developing will split the EU and undermine the idea of unity in diversity.

The assertion that the eurozone could be transformed into a United States of Europe is no longer convincing. The path toward joint liability is far more likely to lead to a deep rift within Europe, because turning the eurozone into a transfer and debt union that can prevent the insolvency of any of its members would require more central power than currently exists in the US.

Comments

EU from the start is based on wrong principals, which, to say it clearly, are *undemocratic*. No democracy makes rules and laws it has to follow "for ever". This is the problem with a eurobond, and also the problem of EU institutions --all of them! The problem originates from the ill basis of occident law practice, which pretends the need to avoid elected representatives favoring vested interests, can be removed by heritable law. In fact, what it does is to trust justice to an oligarchic elite of law bureaucracy.

The rest of the article uncovers the parts of German society that did not want the EU to be anything more than a free-trade area --mostly its bankers. The hypocrisy of the statement about "the creation of a single european state" and of "the dream" of the author of a United States of Europe, are uncovered very easily when he does not accept the need to redistribute wealth. The implication that this is not the case in the US, since it is not in the role of the FED to do it, is false, provided the federal budget is taken into account. Any kind of "united states" would do that, the same as countries do it among their provinces.

The ECB's actions by no means is the correct way to handle redistribution, but they gave time to weak-spirited and unmotivated european leaders. The claim that ECB's actions (buying short-term debt of Italy and Spain or OMT, and buying troubled country bonds called SMP) constitute a "massive redistribution of wealth," is at least untrue. They are given under a memorandum, which is supposed to address conditionality concerns and moral hazard. In fact, blackmail is taking place for each tranche, so that debt (including to ECB) is serviced with priority over domestic needs. Further, OMT transactions are sterilized, which can have some cost for the ECB, payed as interest to banks buying ECB securities. That cost will be eventually distributed to the national central banks. And still, before OMT takes place, the country has to apply to the ESM, which can shrink the need for ECB intervention. So please Mr Sinn, explain us where is the "massive redistribution of wealth"? Isn't all that a lie to cover the "moral hazard" argument of euro-skeptics, with which they attack democracy and the european peoples, to protect the profits and solvency of banks?

Finally, qualified majorities do not protect minorities, but condemn them in advance. Veto and unanimous decision-making may protect minorities. But there notion that Germany is a minority of stable exporting countries in eurozone, does not mean that doing it without the euro can avoid enormous sacrifices in the standard of living in Germany. So strange, there is a price for everything!Read more

Carol Maczinsky - When were the perils of moral hazard and the absolute value of compliance with agreed rules invoked against Germany and France when, with utter disregard, they failed to meet the stability pact rules and no sanctions were brought on them? And if I remember correctly we weren't exactly in a bust scenario back then.

Further, I'm sure I am not the only one that remembers that, although at the time in a merely consultive or facultative role, the commission reviewed national budgets, both prior and post execution. If it lacked independent economic assessment instruments of its own then that is brussels and all of our politicians faults. But the truth is that the political reality was created that there was a technical stamp of approval on all national budgets. Of course that the greeks full on lied and many other countries "debudgeted" is something everyone knew. But this, politically, irrelevant. Read more

Everything is exactly correct up to the point where it seems the author is pointing out that the ECB is somehow favoring a group of countries including Ireland.Let's look at the evdidence shall we?1. The executive board of the ECB does not have any Irish person as by a gentlemans agreement there must always be one from France, Germany, Italy and Spain on the 6 boards members. This agreement is a political agrrement against the statue of the ECB itself.2. Ireland required higher interest rates during its boom periods, the ECB followed countries like Germany which needed lower rates in the early 2000s.3. The ECB forced Ireland to make whole all Senior bondholders in bankrupt financial institutions against the advice of the IMF and common practice for example in the US. There is talk of Ireland taking the ECB to court over this. This amounts to 10s of billions of private investor losses pushed onto the Irish taxpayer.4. The ECB has only reacted when Italy and Spain looked like they might be pushed out of the bond markets, they were not concerned about Ireland.5. Germany recently appionted someone straight from their ministry of finance without a Phd, to the executive board, for political reasons, or to protect the German taxpayer, according to Der Spiegal itself. Basically Dr. Sinn the ECB favored and favors Germnay over Ireland, this is why Irelands boom was too boomy and bust was too serios. The nationalised German lenders were the biggest creditor of the Irish banks. They have been made whole thanks to the threats of the ECB to the Irish government. Read more

Fiscally, the US and European Unions are completely different as they stand today. Yes, US federal money paid by New Yorkers is used to help Mississippi, but the Fed has total control over how much is spent, and exactly how it is spent. Stated differently, Mississippi has completely given up its sovereignty in this issue (which is just what Germany wants in return for more spending in the Periphery).Fiscally, Europe today is more like the individual US states. There is nothing in the state budget of New York to help Mississippi – nor should there be – that is a Federal issue.Read more

Didn’t every thinking person know from the beginning that you cannot have a currency union without a fiscal union, and you cannot have fiscal union without political union??? The whole idea of the euro is one of the tail wagging the dog – i.e. let’s implement the end result and hope the prerequisite pieces somehow come into being.Read more

The grounds of comparison is wrong. The United States federalism is not balanced enough to provide a governance model for Europe. It was the United States unability to regulate its markets which triggered the crisis. Read more

Pernicious way of upholding old national sovereignties in Europe, as if European States really had some effective sovereignty in the globalized world: Germany should not deceive itself, being part of the same destiny. A two-speed Europe would not undermine Europe's unity, it would enhance it on the contrary since it would mean a concrete recovery of effective european sovereignty. The problem is not wether the USE would have to start with fewer member-states than the EU, but if the non-willing EU member-states will allow the willing one to go on and if the willing one will go on nonetheless, keeping the USE's doors wide open to successive memberships. In the USE framework, that is to say in a federal State framework, Sinn's contradictions would immediately disappear: we would have a democratically elected government, with a Treasury, and the ECB could behave like other Central Banks in the World. The "transfer union" would't only be between richer and poorer regions, but above all between richer and poorer social strata. For the sake on the entire community. That's not utopia, that's the only way out of the structural crisis the Europe-of-little-national-egoisms is living: the financial and economic one being only one of its many facets. Read more

You're partly right, in my opinion, but is it a real obstacle? Italy's unity was achieved several decades before italian citizens could really speak the same language and understand each other (dialetti). I'd reverse your idea: without statehood and democracy, there'll be no real supernational education and debate - we don't have a real supernationa education and debate, nowadays, but a struggle for linguistic hegemony (and, paradoxically enough, an english imperium even at the heart of the political discourse about European political unity in the Eurozone...) Read more

The very first step for a democratic elected government was not make sure that every 18th year old European spoke/understood 1-3 non-native languages. It could be done, but is was not done yet...and it is not even in political-developmental discourse in EU. This "tiny" issue just give on more prove how EU top-level policies and discourse are so far-fetched and away from real world issues. Read more

Globalization cannot be undone. Our interconnection is tighter than ever. Therefore, moving forward, each country needs to negotiate and find common ground with the others. Ultimately we will be pushed toward this, as global circumstances continue to decline.And when we are pushed, suddenly we find we can agree. Its been done many times before. Remember the push toward a country's unity when it goes to war. When it comes to survival, we stick together, rise above our silly differences, and get on with it.Well, we're finding that while we are not at war with another country, we are at war with our very nature. We're resisting change, all because we don't want to learn how to rise above and think of the welfare of the whole. When we figure that our current way works, we'll see how we can survive and thrive by us all thinking about and contributing to the whole. In the end, we will have to think about the 'whole' as nature intends. By stubbornly resisting, it'll lead to greater global unrest, war, and then humanities' chance to start over again - with the few remaining people left on the ashes of this planet. At that point people will have to stick together just to make a go of it. Either way, the path points toward unity and learning to rise above our differences.Read more

The globalization of the 21st century is an organic reality, and is about as romantic an issue as the "love story" between the brain, hearts, and kidneys.

But yes, we remain egoistic -- evermore so now than in the past. And this brings on the true romantic mythology of the 21st century, that business as usual -- growth or austerity -- is going to do it for us. In this fast defacing ball we live on, where will you grow, where will you get resources, and just who shall your market be? And as to that -- you need some level of trust in economics for who guards the guards? And as we keep seeing, none can be trusted in terms of the old framework.

No, it will be looking at our differences in the face, overcoming our prejudices, and realize that we are desperately intertwined. We either reach a commonality above it all and seek balance -- to become reborn as a single United Humanity, or we will strangle in our umbilical cord. But Humanity is certainly being driven towards the birth canal by Nature in an unstoppable manner.

Appealing to romantic integration doctrines did not work in the French revolutions, did not work in XX century with the socialist tendencies, and will not work even less in the XXI century of productivity, continues innovation, and sustainability. Only bottom-up business dynamics and job creations in mutual intrapreneurships can create a economic and demographic growth and a truly united Europe. Pin-points individual rich countries such as Germany, or troubled countries such as the ones in the south, as the cause of the problems and eventual split is to go back to the old discourse that the EU was meant to cure. Apparently, it could cure this mind set and it even risk making it come back even stronger. EU is not Europe, and only very marginally represents the majority of Europeans. Read more

People in Europe basically want jobs and good living condition that come with good and predictable salary. The details of the governing model at national or European levels are not so important, unless your are engaged in the building and discourse of Europe (e.g. as a elected MP).Unfortunately, Europe as been enable to generate this for many countries and people. Moreover, central "guidance" by EU preempts serious, intellectual, and real democratic discussion inside the troubled countries -- since governments can use the EU to govern in certain prescribed ways, rather than by emergent local discussion. So what the EU is really doing is the same thing that old Europe always did best over the centuries -- maintain rigid class structures, where only affection or a job with/in public institutions can give sense of security.Lets face it, the EU model of regulate and tax to govern is at odds with the productivity and sustainability demands of this century. Often, is mostly used to preempt natural competition between countries and let "business selection" to operate.Only private intrapreneurship with limited state regulation can bring the expirations the people in line with reality. A unite EU model can only hypothetically exist if its build bottom-up, and this means being built by business and common interest relationships.The organization model being pursuit by the EU is a "canonical country with specificities" model applied to a full continent. While the free open market and mobility were great innovations brought by the EU, because it removed or reduce the power of pre-existing institution in member states -- e.g. border control and taxes -- the new institutions being build start from the same erroneous assumptions that create previous national ones.The EU will not success without home grown business and innovation, and consequent job creation. This is not appending, and the money that was available to make it happen was already (badly) spent. And after the EU -- Europeans will still be around to make happen again -- just better. Read more

The comparison between "Out of many One", and "United in diversity" is very acute and precise.The truth is one of them is an illusion, a lie that is slowly falling apart, while the other one is the truth, which is more problematic, requires greater work, but that is the only reality for humankind.The "Out of many, One" is just as much an illusion as the "American Dream".Even the people of the same family are completely different from each other, and any long term relationship, marriage, friendship, work relationship in business, commando in an army or a successful sports-team requires compromises and building bridges over the differences, specialities of the members of that association.Thus Europe should not abandon the process of building a deeper unity, a deeper integration just because the members states, or even parts of the same countries are so diverse in their mentalities, cultures, colors and sentiments.The only thing they need is a common center point they can unite around, a common goal above their differences that can sustain a cooperation, union, while the differences, characteristics, even rejection, hatred can provide the tension making the union much more powerful, like a resistor in an electric circuit actually performing the work.There are no Hollywood type perfect couples, relationships, "hero nations" fighting as one man with one heart in reality.There is only hard work of accepting the other, working together towards something dear, mutual for all.Humans perceive reality in contrast, even Hollywood movies need the conflict, drama in the middle to make the happy ending sweeter, a good long lasting marriage is built on arguments, disagreements and then resolutions above them, rather then pretending that everything is calm and perfect. When people know exactly where they stand, understanding their differences, rejections clearly, that is when they are capable of building bridges over them sustaining the relationship.Today the motivation is getting clearer by the minute. Humanity has evolved into a global, interdependent network, we have interconnections that are unbreakable, but at this moment we still try to use them selfishly, only for our own sake. This is exploding now in the form of the global crisis.Europe is at a historical crossroad, if the decisions are made wisely within the next year, leading to a true unity, deep integration in a mutually considerate format, the old continent can supply the proper template for the rest of the world, so our species can survive the changing conditions of the ongoing evolution.The only adjustment they could do is to modify the motto: Uniting in diversity is truly not possible, but Uniting above diversity is our future. Read more

Great article. The madness of the agenda for joint debt liability could destroy the dream of political, regulatory, and economic union, which I also share. It's also good to reminded of a practical distinction between the one-country and one-region federalism of USA and Europe. Unlike ECB credit to Spain, the Fed cannot give credit to bankrupt California. They have similar Mediterranean climates, but live under different institutions. Read more

Very interesting and informative article. It's reminicent in some ways of William Hague's speech today, October 23. It all seems to depend on what sort of EU people are looking for. Hans-Werner Sinn examines the value of deeper integration and a single political system and yet don't these assume the distribution of resources he believes harmful? He dislikes the idea of a United States of Europe based on the Eurozone. So would he prefer a fully rounded EU, based on its motto, flexible, the single currency working efficiently, and aware that essentially, member states are sovereign? So far, but no further. Read more

Joschka Fischer
laments the fate of the European Union in the wake of the latest round of the Greek drama.

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